Hedberg v. Pantepec Intern., Inc.

• Citation: 645 A.2d 543,35 Conn.App. 19
• Decision Date: 04 October 1994
• Docket Number: No. 12253,12253
• Court: Appellate Court of Connecticut
• Parties: Ronald M. HEDBERG v. PANTEPEC INTERNATIONAL, INC.

Page 543

645 A.2d 543

35 Conn.App. 19

Ronald M. HEDBERG v. PANTEPEC INTERNATIONAL, INC.

No. 12253.

Appellate Court of Connecticut.

Argued March 21, 1994.

Decided July 5, 1994.

Certification Granted, Limited to the Following Issue Oct. 4, 1994.

L. Page Heslin, with whom, on the brief, were Mark R. Carta and Mary E. Schifferli, Greenwich, for appellant (plaintiff).

Richard J. Buturla, Milford, for appellee (defendant).

Before O'CONNELL, FOTI and FREDERICK A. FREEDMAN, JJ.

FREDERICK A. FREEDMAN, Judge.

The plaintiff, Ronald M. Hedberg, appeals from the judgment of the trial court rendered in favor of the defendant, Pantepec International, Inc. (Pantepec). On appeal, Hedberg claims that the trial court improperly (1) failed to apply the "business judgment rule" to the board of directors' decision approving his written employment agreement because (a) the board's adoption of the written employment agreement was not a defensive mechanism and (b), in applying the test set forth in Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 955 (Del.1985), the trial court improperly found that the written employment agreement was not a reasonable response to the perceived threat to Pantepec, and (2) failed to find that Pantepec violated the Connecticut Unfair Trade Practices Act; General Statutes § 42-110a et seq.; by refusing to honor Hedberg's agreement. We reverse the judgment of the trial court.

The trial court found the following facts. The parties agreed that their claims are governed by Delaware law. Pantepec, a Delaware corporation publicly traded on the Boston stock exchange, is an investment company engaged in exploring and investigating oil and gas properties. Hedberg, who holds a doctorate in petroleum geology, worked as a consultant for Pantepec for several years before being elevated, in February 1985, ¹ to serve as president and director. Shortly after Hedberg became president, he and Pantepec entered into an agreement setting forth the terms of Hedberg's employment. The terms were summarized in a letter dated March 25, 1985. There was no provision for any fixed term of employment, no restriction on termination for good cause, nor any safeguards for Hedberg's benefit in the event of a change of control of Pantepec.

On November 6, 1985, the board of directors voted to increase Hedberg's compensation from $30,000 per year for which he devoted one third of his time to $60,000 per year for which he would devote two thirds of his time. The rest of his benefits remained the same as described in the March 25, 1985 letter. In 1987, Pantepec's board of directors consisted of Hedberg, Harold Hansen, and Frederick Hemming. Soon thereafter, Pantepec hired Rudolph Bremser as corporate treasurer and vice president. Bremser was not a party to a written employment contract. From 1987 to the time of trial, Pantepec never had more than two employees, Hedberg and Bremser.

Between 1987 and 1989 Pantepec actively tried to locate merger partners. In February, 1989, Robert A. Levinson, a New York investor with an expertise in the textile industry, approached Pantepec and advised the board of directors that he felt that it was not to Pantepec's benefit to continue to limit Pantepec's activities to oil and gas investments and that they should turn control over to him. Levinson presented no particular plans for the future of Pantepec, and the directors were concerned that if he took over the company he did not have the requisite expertise to obtain fair value for Pantepec's oil and gas investments. The directors refused, and Levinson put up a slate of his own directors and solicited proxy votes from the shareholders. Immediately thereafter, both Hedberg and Bremser met with Pantepec's attorney and relayed Levinson's ultimatum. The attorney inquired into whether either Hedberg or Bremser had written employment agreements.

On May 22, 1989, while proxies were being received, the board of directors held a telephone meeting to discuss, inter alia, drafts of employment agreements for Hedberg and Bremser. The drafts had been mailed to each director prior to the meeting. All three directors approved Bremser's agreement and, with Hedberg abstaining, the other two directors approved Hedberg's agreement. Hedberg's agreement, governing his employment with Pantepec for twenty-four months, limited Pantepec's right to terminate Hedberg to "good cause," allowed Hedberg to terminate his services under certain conditions, and, in the case of his termination by Pantepec for other than good cause, allowed for severance pay and continuation of benefits for either twelve months or for the remainder of the term of his agreement, whichever is greater. Hedberg signed his employment agreement the following day.

On May 24, 1989, at Pantepec's annual meeting, the shareholders voted on the incumbent slate and Levinson's slate. The vote was so close that the meeting was continued for a recount. On June 15, 1989, the board announced that Levinson's slate had won. On that same day, Levinson asked Hedberg to sign an agreement abrogating his employment agreement. Hedberg refused. Levinson made statements to the effect that unless Hedberg signed the abrogation agreement, he would no longer be employed in any capacity. On June 16, 1989, Levinson advised Hedberg by letter that he did not believe Hedberg's employment agreement was valid, and further, that its terms constituted a breach of the former board of directors' fiduciary duties to Pantepec.

Hedberg continued to perform services for Pantepec until June 29, 1989, when Levinson notified Hedberg, by letter, that his employment was terminated. Pantepec did not pay Hedberg the severance pay or any of the other benefits set forth in his employment agreement.

Hedberg filed suit against Pantepec for breach of his employment agreement. The trial court found that Hedberg's employment agreement was a defensive mechanism, entered into in reaction to the proxy contest, and that it was not entitled to the deference of the "business judgment rule" because Hedberg had failed to meet his burden under the second prong of the test set forth in Unocal Corp. v. Mesa Petroleum Co., supra, 493 A.2d at 955. Because the employment agreement was an unreasonable response to the perceived threat, it was invalid and voidable; thus, Hedberg could not prevail on his claim.

I

Hedberg claims that the trial court improperly failed to apply the "business judgment rule" to the board of directors' decision approving his written employment contract. We agree.

"Under Delaware law the business and affairs of a corporation are managed by and under the direction of its board of directors. See 8 Del.C. § 141(a). In performing their duties the directors owe fundamental fiduciary duties of loyalty and care to the corporation and its shareholders. Guth v. Loft, Inc., 5 A.2d 503, 510 (Del.1939); Aronson v. Lewis, 473 A.2d 805, 811 (Del.1984). Subject to certain well defined limitations, a board enjoys the protection of the business judgment rule discharging its responsibilities. The rule creates a presumption 'that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the corporation.' Aronson v. Lewis, [supra at] 812." Polk v. Good, 507 A.2d 531, 536 (Del.1986).

"The business judgment rule is available to directors even where they are responding to a takeover threat. In those circumstances, however, there is an 'omnipresent specter that a board may be acting primarily in its own interest....' Unocal Corporation v. Mesa Petroleum Co., [supra, 493 A.2d at 954]. As a result, before the business judgment rule will be applied in this context, the directors must establish 'reasonable grounds for believing that a danger to corporate policy and effectiveness existed' and the defensive measure chosen by the board must be 'reasonable in relation to the threat posed.' Id. [at] 955." Shamrock Holdings, Inc. v. Polaroid Corp., 559 A.2d 257, 269-70 (Del.Ch.1989). This is the Unocal test.

"Once the directors make the above showings, the burden shifts back to the defendants who have the ultimate burden of persuasion to show a breach of the directors' fiduciary duties. [Unocal Corp. v. Mesa Petroleum Co., supra, 493 A.2d at 958]; Moran v. Household Intern, Inc., 500 A.2d 1346, 1356 (Del.1985)." Buckhorn, Inc. v. Ropak Corp., 656 F.Supp. 209, 227 (S.D.Ohio) aff'd without opinion, 815 F.2d 76 (6th Cir.1987).

A

Hedberg argues that the board's adoption of the written employment agreement was not a defensive mechanism taken in response to a takeover threat. The trial court, therefore, should not have reviewed its adoption under the Unocal test, but, rather, should have applied the business judgment rule in reviewing the board's adoption of the agreement and presumed that the actions of the board were taken for the benefit of the corporation. We are not persuaded.

Hedberg argues that because the board's decision to approve the written employment agreements was considered prior to Levinson's notice to Pantepec of his interest in the corporation, it was not a defensive mechanism. Hedberg refers us to Buckhorn, Inc. v. Ropak Corp., supra, 656 F.Supp. at 209, for support. In Buckhorn, the federal District Court reviewed particular amendments to the employment contract of an executive under the "business judgment rule" despite the fact they were made after a specific takeover threat to the company. Id., at 215-18, 233-34. The court stated: "Whereas the evidence clearly demonstrates that these measures were contemplated by the directors prior to the tender offer and were unrelated to change of control, the Court believes that it is appropriate to apply the traditional business judgment rule." Id., at 234.

Here, the trial court found "that the employment agreement at issue was unmistakably a defensive mechanism, entered into in reaction...